Topic: Social Security

What America Can Learn from the Faroe Islands about Social Security Reform

I’m currently in the Faroe Islands, a relatively unknown and semi-autonomous part of Denmark located in the North Atlantic. Sort of like Greenland, but too small to appear on most maps.Faroe Islands

I’m in this chilly archipelago for a speech to the annual meeting of the Faroese People’s Party. According to Wikipedia, “the party is supportive of the economic liberalism.” But liberal in this context is classical liberal, so they’re my kind of people.

I spoke on the economics of fiscal policy and talked about issues such as my Golden Rule and the Laffer Curve, but today’s post is about what I learned, not what I said.

The current government of the Faroe Islands, which includes the People’s Party, has modernized its Social Security regime with a system of personal retirement accounts. Starting next January, workers will begin setting aside some of their income to finance a comfortable retirement income. When fully implemented, workers will be putting 15 percent of their income in their accounts, creating a system that’s even larger than the private retirement models in Australia and Chile.

So why did Faroese politicians take this step? Well, unlike politicians in most nations, they looked at the long-run data, saw that they had an aging population, realized that a tax-and-transfer scheme no longer could work, and decided to reform now instead of waiting for the old system to collapse.

Here’s a chart put together by the Nordic Council. As you can see, the Faroe Islands were (and other jurisdictions are) heading to an intolerable and unsustainable situation of too few workers and too many retirees.

Faroe Islands Age-Dependency Ratio

By the way, the same situation exists in the United States.

Our population is aging, the Baby Boomers are going into retirement, and birth rates have dropped. Our long-run numbers aren’t as grim as some other nations, but our Social Security system is basically insolvent.

Indeed, Social Security’s long-run deficit is measured in trillions, not billions. According to the most recent Trustee’s Report, deficits over the next 75 years are expected to equal $36 trillion. And that’s after adjusting for inflation!

For what it’s worth, if a private insurance or pension company kept its books in the same was as Social Security, it would be forced into bankruptcy and its managers would be indicted for fraud..

But when politicians operate a Ponzi Scheme, we’re supposed to applaud them for compassion!

This is why it might be worth the cost if we sent the politicians in Washington on a junket (using their taxpayer-financed fleet of luxury jets) to Torshavn, the Faroese capital. They could eat some lamb and fish and learn what it’s like to responsibly address a problem before it becomes a crisis.

Or we could save the money and simply force them to watch my video on personal retirement accounts.

P.S. In you like gallows humor, you can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke, though it’s not overly funny when you realize it’s a depiction of reality.

P.P.S. You probably don’t want to know how Obama would like to “fix” the Social Security shortfall.

P.P.P.S. On Monday, I continue my tour of the North Atlantic with a speech in Iceland on the Laffer Curve. I don’t know if I’ll say anything memorable, but I’ll use the opportunity to learn more about some of that nation’s policies, including their very successful privatized fishery system. Iceland has some bad policies, of course, but it’s also worth noting that they wisely have rejected membership in the European Union, they’ve reduced the burden of government spending in recent years, and they also made the right decision when they decided (with help from an outraged electorate) to limit bailouts when their banks went bust. You won’t be surprised to learn, though, that the Paris-based OECD has been using American tax dollars to advocate bad fiscal policy in Iceland.

Lindbeck’s Law: The Self-Destructive Nature of Expanding Government Benefits

Relevant foresight from Swedish economist Assar Lindbeck, “Hazardous Welfare State Dynamics,” American Economic Review, May 1995:

The basic dilemma of the welfare state …  is that the more generous the benefits, the greater will be not only the tax distortions but also, because of moral hazard and benefit cheating, the number of beneficiaries. This is a field where Say’s Law certainly holds in the long run: the supply of benefits creates its own demand… .

Serious benefit-dependency, or ‘learned helplessness’, may … emerge only in a long-run perspective. Possible examples of such gradual adjustments are an increased tendency to apply for social assistance, less job search and greater choosiness among unemployed workers, more absence from work for alleged health reasons, more applications for (subsidized) early retirement due to alleged inability to work, and more time and effort devoted to tax avoidance and tax evasion.

P.S. A 2007 empirical study by Friedrich Heinemann supported Linbeck’s hypothesis, finding that “transfer expansion or increasing unemployment tend to be associated with a larger readiness of the country’s population to cheat on benefits.”

Disability Overpayments

CNN.com has an article today on disability overpayments made by the Social Security Administration ($1.3 billion over two years according to a recent Government Accountability Office report). Although people often associate government overpayments with fraud, often times it’s just bureaucratic bungling. 

Take for example this fellow who tried to do the right thing. In fact, he’s still trying: 

One 33-year-old veteran began receiving Social Security disability payments after his left foot was amputated following an explosion in Iraq in 2007. After going through rehab for his prosthetic leg, he began working full-time for a defense contractor in 2009. As soon as he started collecting a paycheck, the veteran, who asked to remain anonymous, reported his roughly $100,000 annual salary to the Social Security Administration. 

When recipients of disability benefits reenter the workforce, they have a nine-month trial period in which they continue to receive benefits. Once the trial period ends and their earnings exceed a certain level – currently $1,040 a month – the payments are supposed to stop. And that’s exactly what happened in his case. 

But then, last July, he noticed a $75,000 deposit in his checking account. Three days later, a letter arrived from the Social Security Administration saying it had reinstated his benefits because he had not been “gainfully employed” during the past three years. 

He called the agency and was told the mistake would be investigated. Finally, in November, he was notified that the benefits he received were indeed a mistake and he must repay the agency. But, oddly, the amount requested was a few thousand dollars less than the $75,000 overpayment he had received. 

Worried he’d be accused of defrauding a federal agency, he filed an appeal – which he was later told had been lost. His second appeal is still pending. While he hasn’t had to pay any interest on the overpayments, he has had to pay more than $23,000 in income tax on that additional “income.” 

Yes, it’s just one story and millions of Americans receive accurate payment for benefits that they are legally entitled to. But as I discuss in a paper on Social Security Disability Insurance, the program is collapsing under its own weight. Indeed, at the same time this veteran is fighting to give the money back, the SSA is “properly” paying out disability benefits to… an “adult baby.”

Senate Committee Hearing on Disability Fraud

On Sunday, CBS’s 60 Minutes profiled Sen. Tom Coburn’s (R-OK) on-going investigation of fraud and abuse in the federal government’s two main disability programs: Social Security Disability Insurance and Supplemental Security Income (see Chris Edwards’ discussion here). Yesterday, the Senate Committee on Homeland Security & Governmental Affairs (Coburn is the ranking member) held a hearing on a particularly egregious example centered on the Social Security Administration’s Huntington, WV office. 

The case is a perfect example of what is quickly becoming known as the “disability-industrial complex”: specialty law firms overwhelming the system with dubious disability claims, doctors vouching for applicants with dubious claims, and federal administrative law judges awarding disability benefits to individuals with dubious claims.

 

The committee produced a 160+ page report that is jaw-dropping from beginning to end. If you’re pressed for time, at least check out the “findings” on pages 4-7. In the Huntington case, it’s pretty clear that the three points of the triangle were all in cahoots. It’s also quite similar to a still unfolding disability scandal in Puerto Rico that I discussed in August. In both cases, the public is now aware of the scandals thanks to the Wall Street Journal’s Daniel Paletta’s excellent investigative reporting. That begs two questions, however: what other major disability scandals are sitting out there waiting for a curious reporter discover? And what other ticking time-bombs are Social Security Administration bureaucrats aware of but doing little to defuse? 

Close Washington to Dismantle the Welfare-Warfare State

The GOP is attempting to defund ObamaCare by holding the federal government hostage.  Congressional Republicans say:  Cut the spending or Uncle Sam will have to stay home. 

Unfortunately, while the public doesn’t favor President Obama’s plan to nationalize American health care, people seem even less enthused about Republican tactics.  Better would be a threat to close down the government because the government should be shuttered.  The GOP should seek to eliminate entire programs and agencies. 

Federal control of health care is a good place to start.  The U.S. medical system is a mess, but the government should not decide who gets how much health insurance in what form through whom. 

Moreover, as I wrote in Forbes online:

Corporate welfare should be another target.  Republicans rightly worry about perverse incentives created by welfare for the poor since federal programs have wrecked families and communities while discouraging education and work.  However, even less justified are a variety of payments to dependent businesses.  Export subsidies, research grants, farm subsidies, housing aid, regulatory preferences, and more.

There’s no better reason to underwrite smaller enterprises, through the Small Business Administration.  Is there really a critical scarcity of liquor stores requiring taxpayers to pay for additional ones? 

Some tasks, such as the Department of Housing and Urban Development, just aren’t Washington’s job.  Worrying about the construction of apartments and homes should be left to localities and states. 

Another unnecessary bureaucracy is the Department of Education.  The national government shouldn’t be trying to run local schools.  And why should lower-income taxpayers subsidize middle-class kids who want to become lawyers?

Grant the federal government authority to create parks involving uniquely scenic or otherwise special lands.  There’s still no reason for the Interior Department to own and manage hundreds of millions of acres of forest and range land. 

The Department of Defense possesses—at the sufferance of foreign governments—hundreds of properties abroad.  While maintaining cooperative relationships with foreign militaries as well as access to some of their bases is useful, the U.S. has no need for innumerable facilities and garrisons around the globe.  The U.S. should act as a back-up against the rare hegemonic threat that friendly states could not handle rather than the guardian against every mundane controversy and conflict that arises elsewhere.

Foreign facilities often are justified as logistical way stations for intervening in the Middle East or Central Asia.  However, Europe should provide the troops as well as the bases to deal with such hot spots as Egypt and Syria.  It would not be isolationism for America to more humbly and prudently engage the world.

Foreign aid should go the way of military intervention.  Even humanitarian assistance can have counterproductive impacts, while economic assistance has been a grand failure, doing more to subsidize debilitating collectivism than promote economic reform. 

There’s much at the Justice Department that should be eliminated.  Federal criminal law has exploded.  In some cases Congress makes crimes out of actions that should be left to civil punishment—environmental disputes, for instance.  Federal lawyers also have become the vanguard of political correctness, enforcing a racial spoils system under the guise of promoting affirmative action.

Other federal sacred cows also deserve challenge.  The Drug Enforcement Agency arrests people because they prefer to get intoxicated with drugs rather than alcohol.  There are scores of welfare and job training programs of dubious effectiveness.  If Washington moved from the income to a consumption tax, the IRS would be smaller and much less intrusive. 

While many people are criticizing Republicans for threatening to close the government over ObamaCare, there actually is good reason to go to the brink on shrinking the American Leviathan.  Washington meddles in Americans’ lives far more than the Founders ever imagined—and circumstances ever justified.  It’s time to reverse the process and really shut down government.

60 Minutes Disability Investigation

The abuse and overspending in government disability programs is so bad that even National Public Radio and 60 Minutes have taken notice. On the heels of this excellent NPR examination of the “disability industrial complex,” the venerable CBS news show last night profiled Senator Tom Coburn’s efforts to uncover fraud in the two big federal disability programs.

The combined spending on Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) has risen to a huge $200 billion a year, so kudos to the mainstream media for sounding the alarm on these programs. What we need now is for other fiscal conservatives on Capitol Hill to stand with Senator Coburn and demand reforms.

There appear to be millions of people on the disability programs whose ailments are not actually severe enough to warrant coverage or who are outright scamming the system.  On 60 Minutes, Senator Coburn guessed that one-quarter or more of the people currently on the disability programs shouldn’t be. The following chart (sourced here) from Tad DeHaven supports Coburn’s assessment:

During the 1970s and 1980s, the ratio of people on SSDI to the U.S. workforce averaged 3.4 percent. That ratio has now more than doubled to 7.4 percent, even though the actual rate of disability among the working-age population is thought not to have increased in recent decades.

The following chart illustrates the problem from another angle. It uses data compiled by Jagadeesh Gokhale from the Current Population Survey on men aged 20 to 59 with a work-limiting health problem. Within this group, a falling share are working and a rising share are going on SSDI and not working.

As DeHaven explains in his recent reports on SSDI and SSI, the rapid growth in these programs is very troubling, and not just because of the rising taxpayer costs. The programs are apparently inducing many people who could be using their skills productively in the economy to instead drop out and go on the federal dole.

All government subsidy programs undermine individual responsibility and induce unproductive behaviors. This is true, for example, of the roughly $30 billion in annual federal subsidies for farm businesses. Each year federal disability programs pump out six times more benefits than farm subsidies, so it wouldn’t be surprising if the distortions and economic harm created is far larger.

SSDI (Problems) in the News

My recent paper on the rising cost of Social Security Disability Insurance is proving to be timely. 

First, the Washington Post’s Michael Fletcher provides a good overview of SSDI’s “issues.” Fletcher highlights a Maine county where the disability rolls have jumped as the local paper mills have shed jobs. That’s because the program has become a quasi-unemployment program, a problem that’s been exacerbated by the economic downturn. One former mill worker who said that he would rather be working now collects disability and “spends a lot of his free time riding his Harley-Davidson motorcycle to bike rallies around New England.” 

Second, The Economist points to research that suggests that SSDI is contributing to a reduction in the labor force participation rate: 

These results suggest that if it were not for people receiving disability insurance, reported unemployment would be far higher. Although DI recipients may initially have climbed because the economy was weak, their numbers will almost certainly not decline when it strengthens again; only 4% of beneficiaries return to work within ten years. The proportion of working-age adults on DI has risen from 1.3% in 1970 to 4.6% in 2013. The impact on participation rates may be cyclical at first and then become structural.

Third, a new Government Accountability Office report estimates that the Social Security Administration paid out $1.3 billion in benefits over two years to individuals who probably shouldn’t have received them. I should caution, however, that although fraud is an inherent problem with federal disability programs (and an improper payment doesn’t necessarily mean fraud was involved), it’s abuse of the system that is the bigger problem–i.e., people legally qualifying for benefits who arguably shouldn’t. 

But yes, fraud certainly exists and that leads to the fourth story. In June, a former Democratic state representative in Missouri pled guilty “to illegally taking $58,816 in federal disability payments while he was working as a state legislator earning $30,000 a year.” Ah, there are so many wisecracks to be made here, but I’ll just go with one: A politician stealing taxpayer money is illegal? Who knew!